Aargh, it is frustrating to see how quickly establishment-serving shallow arguments become conventional wisdom. We get a big dose of this line of thinking from the New York Times’ Joe Nocera in an article titled, “Biggest Fish Face Little Risk of Being Caught.”
Now you can’t disagree with the conclusion: no major banking industry figure is going to be brought to justice. But the explanation he offers is incomplete and misleading, and serves to misdirect the public from more fundamental and more troubling causes.
At the start of the piece, Nocera recounts some of the unsavory acts of Countrywide’s Angelo Mozilo, and mentions in passing two other prime suspects, AIG’s Joe Cassano and Lehman’s Richard Fuld. Then he points to the decisions not to pursue criminal prosecutions of Mozilo and Cassano, and recites oft-repeated arguments. First, it’s too costly. The S&L crisis required a huge commitment of resources by the FBI, that ain’t happening now. Second, it’s too hard. Look at how the prosecution of two hedge fund managers at Bear Stearns failed. Third, the top brass has successfully insulated itself from the really bad actions at their firms.
Let’s deal with these arguments in reverse order. The logic of leadership in America is fundamentally perverted, in that the top brass takes credit and huge paychecks for organizational successes, but is nowhere to be found when their organizations go off the rails. But in the case of Mozilo, Nocera’s list of possible charges that could be laid is revealingly incomplete:
But this case, too, would have been awfully difficult to make. Countrywide’s descent into subprime madness was hardly a secret. It made all sorts of crazy adjustable rate mortgages that required no documentation of income; its array of products was also well known and disclosed to investors. Indeed, Mr. Mozilo was quite vocal and public in saying that the housing market was due to fall, and fall hard. But he always assumed that whatever its losses, Countrywide was so strong that it would be one of the survivors and would feast on the carcasses of its former competitors. No internal e-mail he wrote contradicted that belief.
Was there outright fraud at Countrywide? Of course there was. That is a large part of the reason that Bank of America, which bought Countrywide in early 2008, has struggled so mightily with the legacy of all the Countrywide loans now on its books. But most of the fraudulent actions at Countrywide took place at the bottom of the food chain, at the mortgage origination level. It has been well-documented that mortgage brokers induced borrowers to take loans that they never understood, and often persuaded them to lie on their loan applications.
This is really flattering to Mozilo. First, the statement, “fraudulent actions at Countrywide took place at the bottom of the food chain” suggests that it was low level employees operating on their own. Huh? Countrywide had the best organized call centers in the industry. It has been widely reported that the bank would call borrowers six months after a loan closing and tell them, falsely, that a reset was imminent in order to get them to refi quickly and generate more fees for the bank. Similarly, Countrywide would also advertise specials, most often for no-fee loans. Ex employees have told me that it was a pure bait and switch. The call centers were armed with scripts to tell callers why that product was not good for them and another one was more suitable. My source have told me they are highly confident none of the advertised loans was every sold.
This point to institutionalized patterns of deception, involving senior managers, not low level employees out of control.
Similarly, Nocera suggests investors knew Countrywide’s loans were drecky. That too is misleading. The bank made specific representations about the quality of the loans they were making, and now a number of court cases allege the bank violated those promises by putting far worse loans into its deals. So the idea that the investors knew what they were buying is a canard, and one Nocera surely knows about, and chooses to overlook.
He also ignores what would appear to be an easily provable instance of chicanery, although it may not rise to the criminal level: the “friends of Anglo” program, in which Congressmen were given Countrywide mortgages on extremely favorable terms (I’m told that this program was “marketed” very aggressively to the members of various financial services industry oversight panels). This may be more of a problem from the recipient’s end, since it would seem to run afoul of all sorts of ethics rules. But I imagine a creative litigator could find in it a cause of action against Countrywide, and better yet Mozilo, since he was by all accounts personally involved in this initiative.
Let’s work back to Nocera’s second argument, that these cases are hard to win and the failed Bear hedgie case proves it.
Yes, financial fraud litigation is hard to win. But a single data point proves very little. This case was a clear example of inept prosecution. As Nocera does correctly depict, the feds tried to build a case on e-mails taken out of context, when other e-mails painted a very different picture. This was world class bad preparation (and confirmation bias). This isn’t even a matter of failing to probe witnesses for possible exculpating or confounding information; this is a failure to read documents the prosecution had in hand and connect the dots.
Now this points to a separate issue: the weakened state of the various offices that ought to be chasing banking industry crooks. But using current bad performance to say it’s inevitable is also lame. We’d never accept that from military or a sports team; why are we willing to accept subpar performance from something as important as criminal justice professionals? As we’ve indicated, top law school grads flock to kick-ass prosecutors, so this problem could be turned around faster than most imagine.
And he also has the wrong implicit standard. The goal is not to win every case, or even most cases. It’s to win enough to be a threat and not to lose them in the embarrassing fashion of the Bear case. And prosecutions that fail can still be powerful deterrents. They put information in the public domain that private litigants can use to mount civil cases.
If finance cops can mount credible lawsuits, filing suit will send a chill through the targets. That’s the sort of situation we need to have, that top financial executives see that criminal prosecution is something to be feared.
Let’s finally turn to Nocera’s first reason: it’s too costly, and the successful effort during the S&L crisis depended on the FBI throwing a lot of horsepower at the problem. But this is the wrong analogy. First, we are three years past the crisis, and a lot of forensic have been done. They are not complete, we’ve railed at the important gaps, but this is not a tabula rasa.
But the S&L crisis is not the right model. These cases are much more like Enron, where a number of executives were in cahoots in both creating questionable products and presenting a misleading picture to the outside world. And the Enron case did not start at the top. It used the same model that prosecutors have perfected with the Mafia and drug rings: go after the foot soldiers, get them to turn state’s evidence in return for immunity. For financial crimes, that also vastly lowers the cost of prosecution. The cooperating insiders provide the road map and enable the prosecutors to do much more focused discovery, as well as potentially serving as witnesses.
But why could prosecutors take that approach with Enron? Because it had already failed. We are back to fundamental mess the officialdom has created by leaving the management and boards of bailed-out companies in place. Any systematic investigation of crimes committed during the crisis would also target managers and executives now in place. It would be tantamount to a criminal investigation of the entire enterprise. And we can’t have major financial institutions subject to tha level of scrutiny, now can we? Trying to build a case against a Mozilo any other way is indeed too hard.
So we are back to the same ugly fact set. The overly generous terms of the TARP, and the failure of Team Obama to force management changes on the industry in early 2009 was a fatal error. It has embedded and emboldened a deeply corrupt plutocracy. The only way to go after them, as Eliot Spitzer suggested in the movie Inside Job, may be to target lower and mid-level employees on the widespread and well accepted practice of having securities firms pay for prostitutes and drugs out of research budgets. All it would take is a sufficiently bloody-minded prosecutor. But that sort of individual is notably absent from any of the perches where he could take on this mission. Given what happened to Spitzer, that seems to be no accident.
It is discouraging, isn’t it?
Even the Bush II administration — theoretically as much a representative of the energy industry as the Obama administration is of the financial industry — had enough balls and integrity to prosecute the Enron case and have some corporate malefactors do the orange-suited perp walk.
Not the Obama crew. Not only has it not gone after anybody except for Madoff, but wherever possible it actively conspires to protect the financial industry from prosecution as it assists that industry’s continuing looting and pillaging of ordinary Americans. And most people continue to have no idea of the depths of the systemic corruption and sham that nice community organizer is fronting for: the history books will record this as perhaps the most corrupt era in American history.
Paul Repstock in a comment to another of Yves postings links to a Canadian article about their government not allowing the media to not be factual in their reporting. Yves complaint about the misrepresentation of fact in the article is right on and since it will never see the light of MSM day will never contervail the untruth.
The take away from the article:
“Kania said committee members concluded that free speech guarantees don’t apply to broadcast licence holders in the same way as they do to individuals.”
And as I said in my thanks to Paul,
This is the difference in the US, plain and simple.
America is under control of banks, government and corporations all owned by the sociopathic rich that have used that chink in the countries moral and ethical armor to brainwash enough of us pond scum into thinking that their world is the right world.
History will show whether the rest of us pond scum rise to this occasion.
Mark – don’t forget the Fabulous Fab Tourre, Goldman’s sacrificial lamb.
I’ve long wondered how so many fraudulent loans could be approved without crossing a legal line. But apparently they’ve crossed the line, but everyone in charge is looking the other way.
We’ve also learned that Lehman cooked the books with Repo 105 – but only because the company was thrown into bankruptcy (rather than rescued) so we have access to its books. Does a company have to go into bankruptcy and drag down the economy for us to learn what what really was on their books was a lot of smoke and mirrors?
At what point will political and corporate leadership realize that killing the host (the American consumer) won’t help them in the long run? The American model of privatizing profit and socializing loss is destroying the country.
Main Street notes at conclusion…”destroying the country”.
Only the 2nd Revolution (year # 201?) will redeem the country and will run parallel to France and there several revolutionary regimes over several centuries of history. Yes, America can emulate the revolutionary fervour of France to greater glory.
Review Deval Patrick’s history from civil rights advocate to receipient of fraud derived compensation at Ameriquest. Greed is good.
The cost is argument is always absurd on its face. The answer, no matter what is allegedly too costly (Wall Street CEO prosecutions, duly negotiated union pensions, Social Security, etc.), is always exactly the same: If we have enough money for the Bailout and the Pentagon, we have enough money for this. How will we pay for the one? The same way we’re paying for the other.
So for as long as one cent of corporate welfare spending exists, we can and should always reject any cost argument out of hand. (Nor, it is clear, do we need one cent in new taxes on the non-rich to pay for anything.)
No one among the non-rich should even be willing to have a discussion on these points.
I do agree that no major banking industry figure is going to be brought to justice, within the limits of this kleptocracy.
And I think it is absurd for an even simpler reason: money is not wealth. We have come to conflate the two for obvious reasons, but our belief the two are one is as valid as believing the earth is flat.
Right now money is, culturally speaking, more important than everything else, including humanity, the health of the environment, etc. To say we can’t afford a thing by pointing out the monetary costs, rather than assessing the resources and know-how needed to get a thing done, is to say, “Money is wealth.” Our ‘masters’ expend all efforts to save the monetary system — which is destroying everything — and call that process ‘economical.’ As if perpetual growth were worth saving, as if decadence, war, corruption and greed were worth saving! Insanity.
We are headed for a very rude awakening. My hope is that we realize, in sufficient numbers, that this cancerous system is at fault, not our genes.
You are spot on Toby except America is fast forwarding to the next game show as the pinnacle of entertainment.
Mark, agree completely. Well said.
Yves, good post, as always
I would only add; whatever it is we think we have now, from here on out, things get worse. Much worse. There is no light at the end of this tunnel.
At least not until 2016, the first available target date for a fresh, new candidate to rise up and vie for the American throne; a man, perhaps, of lean and intellectual bearing, gifted with the oratorical fire, a candidate that seems to possess all the hallmarks of a great leader, and most importantly, gives off the vibe that he is incorruptible to the core.
Sorry Max. I disagree. Do not wait for 2016 and some hypothetical “New Savior”.
The time is now! Today is the start of the future. As the old saying goes, ‘waiting for the future to solve problems is futile, because “tomorrow never comes”. And expecting some uncorupyable figure to appear in that future is not valid except in the judeo christian expectation of the second coming of Christ. Besides, if one does nothing to display moral fiber now, why would they be deserving of consideration at some future date?
Max is just trying to pass off establishment-serving shallow arguments as conventional wisdom.
It is amazing how many freedom- and democracy-loving Americans demand that a strongman seize the American throne and wash their dirty laundry.
The only country in the world where to be ruled by an autocrat is considered a human right.
Now you can’t disagree with the conclusion: no major banking industry figure is going to be brought to justice.
Not by the system, no, but balance finds a way back eventually. (No, I’m not talking about EFH and market equilibrium.)
We can do this the hard way or the very hard way. Wise up before catastrophe (ha ha), or hope to make a better stab of things afterwards. (Incidentally, there’s far more to this than mere finance. Finance is but the hypnotic glitter of what’s unfolding. Isn’t it bewitching!)
Sadly, the very hard way sells more movies and nooz papers, makes for more exciting myths, so that’s the one I’m betting on.
No major banker will be prosecuted? Here in DC you should see the spinning going on; no one could have seen this coming…baloney, I shorted AIG starting in 2005 because it was clear to this non-accountant that they not reporting derivatives exposure. Tangello Mozillo should go free w/ hundreds of millions? Yep, he didn’t do anything against the law according to the spin machine. Goldman is so woven into the fabric of DC that prosecution, properly done, would unravel the thousands of cross hatches of politics and wall street that keep both running. JPM, MS, DBa, CS, WFC- they’re all very busy here running to White House meetings on how to spark an economic recovery after they’ve drained the wealth of our country..and others. There are few jobs available outside of the Washington metro area; DC is the only Metropolitan Statistical area w/ rising home prices. All the spinners, “intellectuals” and math wizs are flooding into DC to “solve” the problem they created. Politicians and financial types have absolutely no shame…and take no blame in this mess. Fixing it is just another opportunity to game the country.
it makes me want to vomit.
(the little bracket is vomit coming out of the circle-mouth)
If any one of these shallow careerist hacks actually had to earn a living by working a shitt job to make rent, they’d revise their entire approach to economics within a week.
At least Yves sure seems to like handcuffs. I bet she’s got a whole box full of ’em!
Perhaps a new phrase – Too criminal to prosecute.
The recovery scheme seems to depend on obfuscating the misdeeds as well as the insolvency.
(1) We know the cost of not doing anything – another financial crisis. We need to spend the money here to create deterrence in the future.
(2) The argument in the article that it is hard to prosecute white collar crimes like these is more like an excuse of not doing what ought to be done rather than a reason
(3) Letting the executives claim ignorance when the company’s behavior is found wanting is flawed logic because the same executives take credit for the good performance of the company.. This logic is no different from “privatized gains and socialized losses” and should be unacceptable.
I wonder if we will hear anything on this topic from those regular commenters on NC who spend most of their time either defending the corrupt excesses of capitalism or attacking anyone who dares to criticize this state of affairs.
Because it looks like all their favorite criminals just got away with one of the greatest swindles in American history. None of them will be going to jail, none of them will even be prosecuted.
Yet instead of stepping forward to applaud their heroes along with their ill-gotten gains, the defenders of kleptocracy seem to keep strangely silent when it comes to this kind of news.
I’m quite certain they are all busily re-writing history somewhere else where they can get away with it. Harvard, Fox News, talk radio, anywhere in the USG, at a Bible Spice Rally, or even on a right wing blog, tho none come to mind for some reason.
The Bernank and TurboTax Timmy are doing a good job positioning us for another financial crash (They are probably baseball fans with the three strikes rule). I think we are going to get another bite at the apple for prosecuting people for financial malfeasance.
In this round, they only prosecute people who voluntarily come forward and announce they are doing billion dollar scams. Maybe they will have more interest in actually looking for malfeasance in the next round.
Except that the next round is Armageddon for real and we end up with 310 million dead cat bounces, I’m afraid to say.
It’s looking to me like doing a Japan thing is now our best case scenario. Possibly rather a rosy outlook as well, as we don’t match up well on some critical metrics, like being a net exporter.
Speaking of self confessed scammers: Do we have any assurance that the ‘government financed cell in a prison for profit’ is actually occupied? And if it is, who is the occupant? just wondering mind you…that’s a lot of leverage
To my understanding, law agencies only make the cost argument when comparing crimes of the same type. Murder A and murder B, both comitted by a person of similar social and economic status, and the convicting of either would do the same as far as future prevention. Thus, say, A is picked over B by estimated cost of prosecution. Further, the cost has to be related to the cost of the crime itself. You don’t spend billions going after a kid swiping a stick of gum and you don’t budget a million going after people who’ve stolen billions.
Given this, if Nocera is asking us to pass on prosecuting the examples he cites, what other cases, caused by people in the same class and for the same class of crime, is he suggesting the law pursue? Or is he lumping these crimes with what? The closest thing is Madoff, but a rich person ripping off other rich people is not the same class of crime. If there is no prosecution, where is the deterrence? I really want to know, because I soon will need to advise young people on what careers they should pursue.
Dirk 77 said: “You don’t spend billions going after a kid swiping a stick of gum and you don’t budget a million going after people who’ve stolen billions.”
You do once the neoliberals gain control of the criminal justice system. It’s laissez faire for the neoliberal overlords and a brutal police state for everyone else.
It’s all very well thought out. The idea is to make the underclasses “scream,” as Nixon’s directive so succincly put it. That makes the underclasses clamor to “get the government off our backs,” as Reagan, the next in a long line of corporate waterboys, put it.
The reason the Obama Administration is not prosecuting the rampant financial fraud is the same reason it never prosecuted anyone in the prior Administration for war crimes. They have continued the prior structural criminality of both financial and military enterprises. Prosecuting those in charge of running these enterprises would in essence constitute a prosecution of this Administration’s support of the structure supporting both enterprises. The Obama Administration loves the financial industry just the way it has been, and always will be. The Obama Administration loves the military industrial complex. Friends don’t prosecute friends.
Bush successfully prosecuted Ken Lay and Jeff Skilling. And Reagan prosecuted many during the S&L crisis.
Sadly, there is a mental intoxication that goes with being around a lot of money (or really big numbers). You start thinking it is all meaningful, and you become psychologically addicted. True believers of any stripe are really addicted to their belief system, and cannot stop doing their psychological fixes because there is no support system for detoxing them.
I think you’ve diagnosed Nocera pretty well here. He’s a fool like so many of the current stable of NYTimes “reporters” — have you ever seen video of David Pogue? He’s another tool. Its funny I get the same vibe from the NYT “journalists” that I get from NPR “journalists”: falling over themselves in goofy humiliating gestures of subservience to whatever subject they cover, be it wall street crime or friggin’ tech. Its apparently a highly sought after trait these days for people covering important issues for our “liberal media”. Let’s call it the lickspittle syndrome is something.
YankeeFrank: “Its funny I get the same vibe from the NYT “journalists” that I get from NPR “journalists”: falling over themselves in goofy humiliating gestures of subservience to whatever subject they cover”
Good point. This is why I canceled my subscription to the NY Times and stopped listening to NPR.
The only thing left to do is mock them, speaking of which, Michael J. Smith does a pretty good job on Robert Siegel, in the following post. However he might as well be speaking of Joe Nocera or Chris Matthews, or any of them. These smug assholes are all the same and they’re all interchangeable:
I understand your criticisms of the piece and frustrations with any lack of prosecutions, but the bottom line is that there’s no way a jury is going to find any of these guys guilty beyond a reasonable doubt. Thats Nocera’s point here – these guys were so self-deluded that proving beyond a reasonable doubt is impossible, as the Bear Stearns case showed. Civil cases are much easier and there have been plenty of those – problem is no one goes to jail.
Of course sending someone to jail, does mean the taxpayers get to pay for his upkeep. Civil actions do recover the funds where the perp has not bought an insurance policy as Mozillo did (he bought it from BofA). Once again how many were convicted in the 1930s Insull was not but was ruined anyway, Mitchell was not but made a come back, Whitney was but that was embelzzlement which is easier for a jury to understand. It would be interesting to find a total list of folks on wall street convicted after 1929. If as I suspect the list is small, (and at least some of those were tax evasion charges) then nothing is new its the way the system works, end of story. (Despite the myths taught in high school history and government, yes they are myths part of the american mythology)
Civil cases are usually worthless in this strata. In cases involving high level cronyism the settlements are negotiated rather than imposed. And since both sides of the isle contain lawyers who may be subject to implication, such negotiaions are under contraint.
Perhaps a dose of capitalism might help. Pay the sitting judge on a contigency basis..lol That might put some teeth into penalties.
I see… so a murdering sociopath who is deluded into thinking he’s doing god’s work doesn’t get prosecuted either I suppose… oh wait, that’s who isn’t getting prosecuted in these cases.
I’m willing to take our chances in a court of law. Even if found innocent, its still a deterrent, and produces evidence that is of use in civil cases. Let’s let a jury decide, huh?
Got to be able to get to court before you can take your chances in court. Try getting a lawyer to take a case he knows he can win against a banker attorney who threatens his practice and whose client has already been stripped of everything he owns and can’t pay the hundreds of thousands the case would cost.
This is why you don’t negotiate with terrorists.
That’s the very same thought I had the other day when I read this:
Among other things, Gaddafi has ordered security services to start sabotaging oil facilities. They will start by blowing up several oil pipelines, cutting off flow to Mediterranean ports. The sabotage, according to the insider, is meant to serve as a message to Libya’s rebellious tribes: It’s either me or chaos.
Gaddafi was a good student when it came to learning the tactical ins and outs of neoliberalism.
It might be time to treat financial fraud in the manner we treat major drug dealers and confiscate their resources before trial. That might get the banksters to listen.
Just to be clear, this is wrong:
///It used the same model that prosecutors have perfected with the Mafia and drug rings: go after the foot soldiers, get them to turn state’s evidence in return for immunity.///
In the Enron case, they did the reverse. They targeted the execs to testify against their subordinates.
They got senior managers and C-level execs to testify against the CEO and chairman. I could have been clearer. They most certainly did NOT prosecute DeLay and Skilling first or in isolation. Those cases were built on others at Enron cutting deals, most importantly Fastow, but his deal was in turn based on others testifying in return for immunity (IIRC the treasurer and/or assistant treasurer, cannot recall their names).
This was different than what appears to have happened with Mozilo, which is trying to build a case against him alone in isolation from other executives and senior managers.
And why is this irrelevant? I’m of the view that Countrywide was a criminal enterprise. The frauds were institutionalized. The CDO desks of all the major banks were also engaged in ongoing, serious abuses (although they did these deals under a disclosure regime that lets them get away with more, but that argues at a minimum for putting more light on the fact that this stuff ought to be criminal and these deals should be done under normal registration procedures).
And Enron case was largely about accounting and securities fraud. How is this different than what happened at Lehman? As I have indicated, the fact that one litigator with securities experience (Valukas) said effectively that he would not file criminal charges is not definitive (I’ve heard from other people who are working on the bankruptcy and also worked on Enron and other major financial BKs that his report missed some major issues, in particular, related to derivatives and complex instruments. The problem is I can’t run it as a story because I’d need to cite them and they can’t go public due to their active involvement in the litigation. The Repo 105 scam was actually pretty simple).
Don’t give up Yves. Somewhere in this interlocking mess is a single key brick which will bring it down. I wouldn’t doubt that your growing reputation might make you the recipient of that key. You will face an enormous dillema and responsibility if it arrives on your desk. But, you must not shirk. Find a way to put it out even if it requires sending to some ‘big mouth schmuck in Canada’..:)
The stakes for the future are too great to have petty concerns for ourselves. I will know that people have grasped the threat when the majority starts using their own names on the internet.
The pain will indeed push individuals toward certain activities. Collaboration is one of them and still largely absent in our society.
Hi Paul, I assume you are in Canada?
Where abouts are you? I’m in Kitchener myself. Do you do much thinking about reformation within Canada?
“as Eliot Spitzer suggested in the movie Inside Job, may be to target lower and mid-level employees on the widespread and well accepted practice of having securities firms pay for prostitutes and drugs out of research budgets. All it would take is a sufficiently bloody-minded prosecutor. But that sort of individual is notably absent from any of the perches where he could take on this mission. Given what happened to Spitzer, that seems to be no accident.”
I love this. You want to prosecute random Wall Street guys for supposedly using prostitutes, while holding up Eliot Spitzer — who used prostitutes — as someone who was unfairly punished for his sins. A more succinct expression of ideologically-motivated hypocrisy has rarely been seen.
F. Blair: “You want to prosecute random Wall Street guys for supposedly using prostitutes.”
God forbid that anyone on Wall Street should ever be prosecuted for anything.
Patrick Bateman: I hope I’m not being cross-examined here.
Detective: Do you feel that way?
Patrick Bateman: No, not really.
“God forbid that anyone on Wall Street should ever be prosecuted for anything.”
I’m happy to see people on Wall Street prosecuted for real crimes. But giving Spitzer a pass on his patronage of prostitutes while saying low-level guys should be threatened with jail time for the exact same offense is the height of hypocrisy.
First, Spitzer pointed this out himself.
Second, you REALLY missed the point. Spitzer paid for his hookers out of his own pocket. Inside Job made very clear that the funds are coming from the Wall Street firms themselves. A madam described how she’d have to write invoices to get checks cut to her! This makes it an institutionalized practice. Not only are the guys who submitted the expenses guilty, but the managers are too. And this practice is so widespread you can drill way into these firms.
I knew an office manager once who tried to put a new coffee pot for the office on the expense account and accounting dinged it. Knew another guy that worked at a place that had a pay copy machine. Everyone had to submit an expense account to reimburse their copy “costs” and submit a note stating what biz purpose the copies were for.
Just thought I’d mention that.
Now Cedric; Bean counters are the ultimate bureaucrats. As such they have perfected the art of sucking up and pissing down. Therefore it should be no surprise to you that there is a qualification threshold: those above the beancounter can justify what they want to, but those below, better watch out because they will be required to help pay for the upper eschelons excesses.
Also, this is completely wrong:
“And the Enron case did not start at the top. It used the same model that prosecutors have perfected with the Mafia and drug rings: go after the foot soldiers, get them to turn state’s evidence in return for immunity. For financial crimes, that also vastly lowers the cost of prosecution. The cooperating insiders provide the road map and enable the prosecutors to do much more focused discovery, as well as potentially serving as witnesses.”
This is absolutely not how the Enron prosecution happened. Who are these low-level “foot soldiers” that supposedly turned state’s evidence? It’s like you’re just inventing stuff to suit your argument.
As I said above:
They got senior managers and C-level execs to testify against the CEO and chairman. I could have been clearer. They most certainly did prosecute DeLay and Skilling first or in isolation. Those cases were built on others at Enron cutting deals, most importantly Fastow, but his deal was in turn based on others testifying in return for immunity (IIRC the treasurer and/or assistant treasurer, cannot recall their names).
This was different than what appears to have happened with Mozilo, which is trying to build a case against him alone in isolation from other executives and senior managers.
So I disagree with your characterization. The case against DeLay and Skilling was most assuredly built on other lower level insiders first providing evidence against them. That in turn requires a broader probe at levels below them. Nothing analogous appears to have taken place with Countrywide.
“They got senior managers and C-level execs to testify against the CEO and chairman. I could have been clearer. They most certainly did prosecute DeLay and Skilling first or in isolation. Those cases were built on others at Enron cutting deals, most importantly Fastow, but his deal was in turn based on others testifying in return for immunity (IIRC the treasurer and/or assistant treasurer, cannot recall their names).
“This was different than what appears to have happened with Mozilo, which is trying to build a case against him alone in isolation from other executives and senior managers.
“So I disagree with your characterization. The case against DeLay and Skilling was most assuredly built on other lower level insiders first providing evidence against them. That in turn requires a broader probe at levels below them. Nothing analogous appears to have taken place with Countrywide.”
Come on, Yves. There’s no analogy between what happened at Enron and the strategy you’re suggesting prosecutors should pursue. At Enron, the C-level execs who turned state’s evidence were prosecuted for, and pled guilty to, abetting the very fraud that Fastow, Skilling, and Lay orchestrated. They weren’t “foot soldiers” — they were the guys who played a key role in the fraud. (Fastow, for one, far from being a foot soldier, was arguably the central player in the fraud — certainly he was far more culpable than Lay.)
And they didn’t start at the bottom and from that build their case — they knew what Skilling, Lay, and Fastow had done, and they used that knowledge to get the other executives to flip.
Your argument, by contrast, is that prosecutors should go after low-level guys for crimes that had nothing to do with the high-level fraud, like prostitution and drug use, and then get them to flip. Setting aside the dubious logic of prosecuting people for these non-crimes, it’s far from clear that these people would have the kind of proof that would actually be useful in prosecuting someone like Mozilo.
You’re also making hugely unsupported judgments about how the Justice Department approached the Mozilo case when you say that “nothing similar appears to have taken place with Countrywide.” I have no doubt that Justice looked at whether they could get other top executives to flip at Countrywide, particularly since the SEC went after a number of them. But prosecuting them convincingly had the same problems that prosecuting Mozilo did — there isn’t convincing evidence of explicit fraud the way there was at Enron. The Enron case, while seemingly complex, was actually quite simple at its heart — Enron said that these off-balance-sheet vehicles were independent, and that their debt therefore didn’t belong on Enron’s books, when in fact they were managed by Fastow, didn’t meet the criteria for independence, and Skilling had promised to guarantee any losses. It was an undeniably material misstatement of fact that Skilling, Lay, and Fastow knew about and (at least in the case of Skilling and Fastow) set up. Nothing so simple can be said about Countrywide, which is why, even in this post, your explanations of what, exactly, Mozilo did that was criminal are frustratingly vague. Justice couldn’t flip lower-level execs at Countrywide because they had no hammer to hold over them, and a Mozilo prosecution would have been an almost-certain loser of a case. Given that, it was sensible for Justice to decline to prosecute.
You are wrong about how this worked. The DOJ worked up the organizational hierarchy.
I’ll give you a piece of the sequence:
Treasurer Ben Glisan pleads guilty in return for a reduced sentence That’s September 2003.
That helps them nail Fastow, who cops his deal January 2004.
Fastow then testifies against Skilling and DeLay.
You may not like my use of the term “foot solider” but relative to DeLay and Skilling, Glisan was a foot soldier.
This is a CLASSIC mob prosecution route, you move up the org chart and get the lower guys to turn evidence on the more senior ones. You are off base in your position here.
And as to the process at Countrywide, are you kidding me? Look at the amount of OBVIOUSLY crooked behavior I cited in the post. Bait and switch, the friends of Angelo program, etc. This information is in the public domain.
And we also have evidence that I’ve cited in other posts that Countrywide failed to convey the notes to securitization trusts even though they (as the origator/structurer of these deals) represented they were “selling” them, which includes conveyance. The statute of limitations for civil securities litigation is three years, but for criminal is five.
As I indicated, the idea of bringing down Mozilo in isolation is ridiculous. You’d need to do a criminal investigation of him and at a minimum the relevant C-level execs (the CFO, the head of the sales operation) and their direct reports. The authorities have always depicted this as an investigation of Mozilo, not of Countrywide. That was pretty much guaranteed to come up empty. You investigate to uncover or prove you theories of the criminal activity, then you see if you can tie it to the kingpin.
If any of that had been pursued in a more serious manner, you’d have seen signs of more groundwork laid, particularly involving lower level managers (presumably ultimate responsibility is C-level but you start further down). Nocera so much as concedes that there was fraud at the lower levels of Countrywide. Great, prosecute that, and see how far up the organizational chain that leads you. Has anything like that happened? There was litigation by the California AG but state AGs have only restricted grounds for litigating banks; many types of cases can be brought only at the Federal level.
The litigation started at too high a level for it to have high odds of success. The conduct in the Bear case, in the SEC civil litigation against Countrywide execs (http://www.sec.gov/litigation/litreleases/2009/lr21068a.htm), and various Congressional investigations suggests that investigators relied overmuch on e-mails. They are useful places to start, but you need real people in the organization to describe practices, procedures, what went on in meetings.
And you also have Sarbox. That should have been used against Fuld as well and wasn’t, and I suspect a reasonable scrutiny of Countrywide documents would have revealed failure to disclose the operations of the business accurately. No private investor has had any incentive to argue that because the garbage barge was sold to BofA at an price that even at the time looked rich.
The reality is that the SEC knows only how to do insider trading cases, and the DoJ appears (understandably) to be lacking independent expertise in securities and accounting related matters. The fact that a case was not brought does not prove a case did not exist. In addition to the SEC being kept short staffed, as an SEC insider pointed out in an earlier post, the incentives favor not prosecuting but getting settlements and moving on. That creates a vicious circle: the staff is going to be light on experience and rationally concerned about their odds of success.
And further consider the incentives: both the prosecutors who don’t prosecute and the banking industry have every reason to depict these cases as unwinnable. The fact that Spitzer was able to be as effective as he was from the New York State AG’s office (yes with the Martin Act but otherwise a not a great place for building a good team) suggests a lot more can be done than is being done.
As for the comparison to Enron, there is an equally simple case here. Countrywide sold 96% of the loans it originated into securitizations. I had gotten reports, both from foreclosure defense lawyers who have tracked down notes that were securitized to Countrywide (as in literally the guy walked down the hall and produced the note and said all the notes were there) as well as from senior industry executives that the standard industry practice was not to convey notes. A Countrywide executive testified that as a matter of practice the notes were not conveyed. That is contrary to what securities investors were sold.
The remedy is recission. The deal would be unwound. Adam Levitin in Congressional testimony described what the consequences would be:
Rescission would mean that the securitization sponsor would have the notes and mortgages on its books, meaning that the losses on the loans would be the securitization sponsor’s, not the MBS investors, and that the securitization sponsor would have to have risk-weighted capital for the mortgages. If this problem exists on a wide-scale, there is not the capital in the financial system to pay for the rescission claims; the rescission claims would be in the trillions of dollars, making the major banking institutions in the United States would be insolvent.
So there is a case here, and the scale of the abuse is such that I would have to believe it rises to the level of criminality. And since I got confirmation of the failure to convey from the head of another subprime lender, I’d find it hard to believe that C-level executives were not aware of it.
So I believe there is at least one case here against Mozilo and probably many other banking execs. And no one wants to pursue it because no one wants to expose this particular fraud. The collateral damage is deemed to be unacceptable.
The irony here is not only were these corporations not “TBTF”, but it was absolutely imperative they fail. We had financial armageddon on the ropes and breathed new life into it’s lungs.
The problem is that the conspiracy and web of money is global. For anyone attempting prosecution, that might also be a weakness that could be exploited. Iceland is the only country in the world to have dared reject the authority of the Banking Cabal. There are currently prosecutions underway in Iceland for crimes by bankers. A small possibility exists that if the Cabal is not able to win in Iceland and if also, they are not able to ‘liquidate’ (I’m serious) those bankers, that the conspiracy may start to unravel in that country.
In the 10 years I was a mortgage broker, I never placed a loan with CW. Aside from being a mysogenist organization, they were clearly (and I was very naive) a bunch of crooks. They also (as well as ALL Lenders) used the incentive of far more commission to mortgage brokers who did the crazy deals than the regular ones. You were penalized financially for doing clean loans. The will never be prosecuted because it’s the old adage that the police are policing themselves.
There is one other alternative…. strengthen the corporate criminal code. I highly recommend reading “Corporate Bodies and Guilty Minds” by William S. Laufer (full disclosure: he is a professor of mine) and possibly Matt Taibbi’s article in Rolling Stone on how corporations are rarely held liable, and are even less frequently sanctioned. No better equalizer than a credible threat of criminal prosecution.
That is a continuing source of frustration. Why do folks like Nocera throw up their hands and tell us we need to resign ourselves to big people stealing from the rest of us (by looting companies and leaving the rest of us to pick up the tab) instead of saying, “Damnit, this ought to be criminal, the fact that it ins’t means there is something wrong with the rulebook.”
How does one regulate an inherently crooked business, government backed fractional reserve banking? And if it could be done would we still have these problems after 317 years?
We need fundamental reform. How many Great Depressions and possibly world wars can we survive with this SOS?
But please keep on Yves. I love your work and even hit the “Donate” button. (I suggest others do so too, at least once.) It’s easy for me to do the easy work and recommend fundamental change because you are in the trenches exposing the current corrupt system. Thanks.
Why do folks like Nocera throw up their hands and tell us we need to resign ourselves to big people stealing from the rest of us (by looting companies and leaving the rest of us to pick up the tab) Yves Smith
Ah, now I see your point more clearly. So your point is that bank officials should look out for the interests of the stock holders?
I see poetic justice. Those who become bankers by investing in banks get looted themselves by the management.
It’s said that one cannot cheat an honest man. Should we have sympathy for bank stockholders or bank bond buyers if they are looted since the business they invest in is based on looting?
OK. Me bad. I see the innocent taxpayers are left with the tab too.
The New York Times financial coverage is almost always bad. That’s because they don’t have a single reporter who can or will look at the big picture. The result is hit and miss with many more misses than hits. It’s Upton Sinclair’s observation in practice, they aren’t paid to understand this stuff and they dutifully don’t.
“The overly generous terms of the TARP, and the failure of Team Obama to force management changes on the industry in early 2009 was a fatal error.”
Not an error, or a bug, but a feature.
“All it would take is a sufficiently bloody-minded prosecutor.”
For a moment there you had me worried when I read that sentence.
Perhaps I should not have moved *all* of that $1.5 billion taxpayer bailout money to my personal accounts in offshore banks, including HSBC London; Bank Julius Baer, Zurich; Credit Suisse, United Kingdom; SG Private Banking, Geneva; Banque Franck Galland & Cie S.A., Geneva; RBS Coutts, Zurich; Coutts Bank Von Ernst, Geneva and Toronto Dominion Bank, Canada, etc
Maybe I should have kept more funds in New York to pay off those scary SEC regulators, ha ha ha
But according to TG, Obie says I have nothing to worry about, so I’ll just pop another xanax and chill…..
First off, I truly appreciate the fact that you corrected the record so well.
That said, and while I share your frustration and outrage, it is important to note that Joe Nocera is doing what he has to do: he is an establishment journalist, therefore, by definition, there cannot be a substantial difference between what he writes and the PR lines spewed by officialdumb in the go-vermin or in the banksters’ system. It is what establishment journalists do if they want to preserve their wages, wealth and privileges.
For much more on this corrosive phenomenon that is undermining the very fabric of this country, see Glennzilla’s writings here:
And, by far his best column on the topic, since it expose the galactic level of sleaze, slothfulness and stupidity of the punditry like nothing else can:
Of course, I could also invoke Clay Sharky, Jay Rosen and others, but I believe the 3 links I offered tells a good part of the story.
Keep up the great work…and give’em hell!!
The sooner we accept that we live under an alpha ape ideology (Neo-Liberalism) and have to constantly fight to get it under control the better off we’ll be. This is the United Sachs of America not July 4th America. The latter was always a passing fantasy.
Stieg Larsson, the popular fiction writer, died in 2004, yet even he seems to have had a better grasp of the financial crisis which began in 2008 than Joe Nocera or any of the NY Times financial journalists who have actually been living through it.
In the following excerpt Larsson’s hero Blomkvist, expresses “contempt for his fellow financial journalists”.
“A bank director who blows millions on foolhardy speculations should not keep his job. A managing director who plays shell company games should do time… The job of the financial journalist was to examine the sharks who created interest crises and speculated away the savings of small investors, to scrutinize company boards with the same merciless zeal with which political reporters pursue the tiniest steps of out of line of ministers and members of Parliament.”
Really? The job of a financial journalist should be to investigate the sharks instead of covering up for them like Joe Nocera.
Hard to imagine.
Sounds almost quaint in this day and age.
Thanks, again, Yves. For always being ready/willing/able to get underneath the deeper meaning – to the ‘deeper’ deeper meaning. I’m not even done reading and I want to comment now so I don’t lose my thought. Yves, you really are a blessing. Your antidotes soften the pain of what we have to/choose to read.
Anyways… when I read that the nominal ‘Mozilo’ club would be explored. I honestly got a little thrill in my heart. I thought all that suff was super-secret archives by now.
Whoever decided to stand up for justice and law and keep the ball going, regardless of ___________________, I salute you.
Please keep the ball going. It’s not about one individual’s wrong-doing. [Although it’s pretty nice when they put their name on their personal evidence trail.] It’s about the idea that what these guys [collectively] did to the country and to the world is ‘ok’, and should be ‘expected’ from time to time.
We can’t let that idea become who we are. If it’s not still ‘Truth, Justice and the American way’ then what else have we got?
You my dear, are an antidote.
Now I am going to read the rest of the article.
Since we can’t afford to prosecute them, how about we save even more by not bailing them out?
Or take the billions spent on bailing them out, and divide it up between the tax payers (if you paid tax last year you get an even share, if you didn’t pay any tax you don’t). This puts the money in the hands of real people who will spend it on real things, not in “expert” hands who couldn’t even explain what they had or how it worked.
“All it would take is a sufficiently bloody-minded prosecutor.”
Patrick Fitzgerald seems to fit the ticket – smart, dedicated, honest, tenacious and seemingly gifted with a highly sensitive b.s. detector. Plus, he’s still on the payroll last time I checked.
So why hasn’t he been turned loose on this unholy mess?
Probably because he’s smart, dedicated, honest, tenacious and seemingly gifted with a highly sensitve b.s. detector.
I do not know what happened to him with SIGTARP. The Congressional Oversight Panel was tougher than he was. My DC contacts tell me he is political. Busting drug kingpins involves physical risk but no career risk. Busting bankers probably entails the reverse.
Despite Yves complaint with this statement
“fraudulent actions at Countrywide took place at the bottom of the food chain”
I think one point that is missed, is that is really where the fraud took place. I have friends that all worked in a “boiler room” environment just before the boom. There are two tactics I could not believe they would use. The product was questionable. First, if the customer did not have enough credit limit on their credit card to buy the product they would conference call the credit card company and ask for a credit limit increase so that the customer could buy the product. Second, when that was no longer allowed, they would phish and try and see how much credit limit was available and then set the highest price they could. When the state AG came down on them, those are the two practices that were stopped. The third was promises. Instead of saying, “you’re going to make a lot of money on this”, they had to change the semantics to “this could make a lot of money”.
I really don’t know if getting the head guy makes a difference, but I think this argument overlooks the fact that salesmen and saleswomen run amuck also act nefariously. It defintely takes some fear at the top to create a compliance structure that monitors the little fish, but busting some little fish feeds to the top too if being compliant is not as profitable as ripping people off.
SH wrote: ‘“fraudulent actions at Countrywide took place at the bottom of the food chain” … one point that is missed, is that is really where the fraud took place …in a “boiler room” environment (where) …salesmen and saleswomen run amuck … (because being compliant is not as profitable as ripping people off.’
Sure. A social ecology of systemic fraud is intractably devastating. It’s hard to appreciate how bad things can get when all the footsoldiers run greedily amok, out of control.
Post-bust,the Obama administration’s phony HAMP and similar efforts to “help stuggling American homeowners” — intended by the administration and Geithner/Treasury to help banks foreclose in the most orderly way that best feeds banks’ balance sheets — have created the same tidal wave of systemic fraud in the servicing and foreclosure mill industries.
It’s absolutely, stupidly self-defeating, given the administration’s aims.
All those tens of thousands of grunts in those industries’ equivalents of boiler rooms have greedily run amok for the last two years, trying to juice scared American homeowners every possible way they can, happily pushing tens of thousands more households into foreclosure. This then depresses real estate values in most U.S. areas further; more people then consider walking away. So it goes, and the process will almost certainly not have run its course by 2012, when the Obama administration will look around pre-election at the vast damage and wonder who to blame.
Has anyone provided a satisfactory explanation as to why President Obama hasn’t gone after Steven Rattner?
Generally opposed to executing people for committing crimes [especially in the U.S. which has a population constitutionally unable to shake class and race discrimination in matters of criminal justice] I have a grudging admiration for the Chinese manner of dealing with political and economic corruption. A few times every year a mayor or business crook is executed. Is executing someone for a crime requiring great amounts of calculated behavior [all financial crimes are crimes of calculation] if the crime is big enough? If a would be bankster has to include in the bottom line his/her own mortality or the possibility of being executed surely that would act to deter some behavior and thereʻs not more stimulating of cooperation in locating assets than a suspended death sentence, the suspension of which depends upon the continuing assistance in recovering pilfered assets.
p.s. to prior posting. I was persuaded to this attitude by a conversation with some middle class Chinese that I was having lunch with when the topic came up and one lady, in response to the question of how appropriate the death penalty is for white collar crimes or crimes by officials, responded “Whatʻs one corrupt bureaucrat more or less.”
Somewhere in the past 24 hours I saw the latest acronym that perfectly describes our place along the continuum, TCTP.
What is TCTP? A cousin to TBTF.
TOO CRIMINAL TO PROSECUTE = TCTP
Only in America in the here and now.
As a non USA citizen I find it incredulous, and highly disturbing, what i am reading here, particularly these statements :
“Two and a half years after the world’s financial system nearly collapsed, you’re entitled to wonder whether any of the highly paid executives who helped kindle the disaster will ever see jail time … Increasingly, the answer appears to be no. The harder question, though, is whether anybody should.
“THE HARDER QUESTION, THOUGH, IS WHETHER ANYBODY SHOULD.”
This is not just an issue local to the USA, these banks defrauded around the world. Whether anyone can be held criminaly responsible may be debatable in the USA. it is of great concern to the rest of the world and will continue to be so until those responsible are no longer able to perpetrate these crimes.
“Now you can’t disagree with the conclusion: no major banking industry figure is going to be brought to justice.”
I am saddened to think that anyone would agree with his conclusion, or that there is yet a conclusion ! !
This is what America has come too ? An acceptance of high level fraud and crime by the judicial system and a resignation by the people that nothing will be done to the perpetors ?
correction to last comment : the final word should read “perpetrators”
I fell strongly that if the Holder DOJ were not derelict in this matter, the outcome of the last election would have been very different. Obama would have been a hero to many conservatives and liberals alike. The most legitimate criticism of the administration from the Tea Party is that they are tools of Wall Street (they are IMHO, but so is everyone else).
Imagine how different things would be if Obama had changed priorities to suit circumstances, i.e. not pushing for health care legislation and instead, taking what would have been an enormously popular tough stand against criminal banksters. All it really would take is to throw a couple of them in jail for a long, long time and I bet attitudes on Wall Street would change pretty quick.
Now it’s hard to imagine anyone can possibly be elected president without the blessing of the banksters. I’m afraid the US is pretty much screwed.